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Money and Property: Interest and Self-Interest

From one of the most powerful and prescient books of our time, "The Ascent of Humanity" by Charles Eisenstein:

Money and Property: Interest and Self-Interest

In the empires of usury the sentimentality of the man with the soft heart calls to us because it speaks of what has been lost. -- Lewis Hyde

Our system of money and property contributes in many ways to the process of separation: of people from nature, from spirit, and from community. For one, the monetized life depends on distant, impersonal institutions and the anonymous specialists that compose them, rendering us less tied to our neighbors. Secondly, the nature of money transactions is closed, in contrast to open-ended gift-giving which creates obligations — literal ties that bind a community. Thirdly, by its very nature as an abstract representation of value, money creates the illusion that utility, the good, is something that can be counted and quantified. Fourth, the concept of property makes the world into a collection of discrete things which can be separated, sold off, and owned. To own something is to separate it out from the commons and subordinate it to oneself. Accumulation of property, and particularly money, represents an annexation of the wild into the domain of self, creating a perception of security that is not really there, separating the self even more from the rest of the world, and reinforcing the illusion that pieces of the world can be separated out and made mine.

Yet the original purpose of money is merely to facilitate exchange. On the face of it, exchange should bring people closer together, not separate them. In Chapter Seven I will describe a money system that will do precisely that: undo separation, build community instead of breaking it down, bring us closer to nature instead of distancing us. Such money systems already exist in embryonic form, and to understand what characteristics they need to have, it helps to understand what characteristics they must not have.

There are two central characteristics of present-day money that drive the conversion of social, cultural, spiritual, and natural capital into financial capital, and which are also bound up with our self-perception as separate beings in a universe full of discrete objects. These two, deeply interrelated, characteristics are scarcity and interest.

Scarcity and interest are products of the way modern-day money is created: it is lent into existence by banks. While this has been partially true for several hundred years, until 1971 there was (at least in theory) a commodity backing — gold — for the U.S. dollar, and therefore for other currencies pegged to the dollar. But since the dismantling of the Bretton-Woods system in 1971, currency has not been based on gold or any other commodity. The amount of new money banks can create by making loans is limited only by their own reserves (and ratio requirements and the discount interest rate). The total level of these reserves economy-wide is determined by the Federal Reserve (or outside the U.S., the central bank) through the purchase and sale of government securities.

Bernard Lietaer comments, "For a bank-debt-based fiat currency system to function at all, scarcity must be artificially and systematically introduced and maintained." When a bank extends a loan, the borrower must pay it back with interest, which he competes with everyone else to procure from the limited amount of still-to-be-created money. Governments and their central banks must exercise careful control — through interest rates, margin reserve requirements, and, most important in the present era, purchase or sale of government securities on the open market — over the rate at which this new money is created. Theirs is a difficult balancing act between tightness, which creates more scarcity, intensifies competition, and leads to bankruptcies, layoffs, concentration of wealth, and economic recession, and looseness, which creates less scarcity, higher inflation, and increased economic activity, but at the risk of runaway inflation and complete currency collapse. In order to prevent the latter eventuality, money must be kept scarce, consigning its users to perpetual competition and perpetual insecurity.

The bank-debt fiat currency system is not the deepest source of scarcity and insecurity, however, because both are built in to the phenomenon of interest, which itself has deeper roots in our self-conception. The bank-debt currency system we have today is founded upon interest. That's the motivation for banks to create money in the first place. Creating money is only a side effect, irrelevant to the commercial bank, of their main purpose of earning a profit. Another side effect is the necessity of perpetual economic growth and, consequently, the conversion of all common wealth into private monetary wealth described in previous sections.

Let's trace how interest leads to scarcity, competition, and the necessity of perpetual growth. Since nearly all money in the economy is being lent out at interest through one mechanism or another (deposits, loans, etc.), it follows either (1) that some of these loans must end up in default, or (2) that the supply of money must grow. If I am to pay back a loan with interest, I must obtain that extra amount beyond the principal from somewhere else. If the money supply is not growing, then a percentage of wealth-holders corresponding to the prevailing interest rate must go bankrupt. In other words, if there are one thousand dollars in the world, and they are lent out at ten percent interest to ten people, then one must go bankrupt to supply the other nine with the money to pay back their loans after one year. That is how interest sets us in competition.

In the real world, of course, the money supply is not static, it grows. But that does not alter the underlying dynamic of scarcity and competition. At any given moment, we collectively owe more money than exists right now. Where will the new money come from? In today's fractional reserve banking system, new money does not come from mining more gold and minting more coins. It appears every time a bank or other institution makes a loan. To whom will a bank lend money? Preferably to someone with "good credit", which quantifies a judgment of one's ability to compete for money and therefore to pay back a loan with interest. In today's system, money does not exist without debt, debt does not exist without interest, and interest drives us to earn more and more money. Some of us can take the money from others, but collectively we must create new goods and services. That is ultimately what our employers pay us to do. Either as entrepreneurs or employees, lenders or borrowers, we participate in the conversion of social and natural capital into financial capital.

When new money is loaned into existence system-wide in amounts exceeding the ability of the economy to create new goods and services, the result is inflation. More money chases fewer goods. The currency will lose its value, an eventuality distasteful to those who hold lots of it (creditors, the rich and powerful). It would seem good for the rest of us, we who were once known as the "debtor class", but unfortunately inflation is subject to powerful positive-feedback mechanisms that cause it to "run away" and collapse the currency. To prevent this, non-inflationary economic growth — an increase in the production of goods and services — is structurally necessary for today's money system to exist. That is what drives the relentless conversion of life into money I have described in this chapter.

The need for growth, the built-in scarcity of modern money, the phenomenon of interest, and the pervasive, continual competitive basis of the modern economy are all related. Wherever money has landed, traditional gift economies have deteriorated as competition replaced sharing as the basis of economic interaction.

And for what purpose, this artificially induced competitiveness, this omnipresent scarcity, anxiety, and insecurity of modern life? We are, after all, living in a world of material plenty. As perhaps never before in human history, we have the capacity to easily fulfill all the physical wants of every human being on the planet. Ironically, our system of money, the very symbol of wealth, creates scarcity in the midst of this plenty. To what end? The purpose of money, after all, is first and foremost to facilitate exchange. Bernard Lietaer writes, "The current money system obliges us to incur debt collectively, and to compete with others in the community, just to obtain the means to perform exchanges between us." In classical economics, the competition inherent in scarce money is thought to be a good thing, for it induces efficiency. But in a world of plenty, is efficiency really the highest good? No, especially when efficiency equates to the swiftness with which common wealth is converted to private capital.

The question to ask, then, is whether another kind of money system might serve the need of facilitating exchange (and certain other needs) without inducing the relentless incineration of social, cultural, natural, and spiritual capital that fuels economic growth today. For it would be wrong to pin the ultimate blame on money per se. Money as we know it developed in the context of our entire civilization; it is not only a cause but also an effect of our general economic system as well as our world-view, our cosmology, and our self-definition. Money as we know it embodies and reifies our deep cultural assumption that the world is amenable to cut-and-control: division into discrete pieces, objects, that may be labeled and transferred. Money scarcity grows from and reinforces the idea, implicit in the technological management of the world, that we must manipulate and improve upon nature in order to obtain the means of survival; it is linked to survival anxiety.